S&P Enterprises sold 10,000 units of inventory during a given period. The level

Question

S&P Enterprises sold 10,000 units of inventory during a given period. The level of inventory of the manufactured product remained unchanged. The manufacturing costs were as follows: Variable Fixed Unit manufacturing costs of the period $11.00 $7.00 Unit operating expenses of the period 3.00 2.50 Which of the following statements is true? Net income will be the same under both variable and absorption costing. Net income under variable costing will be $45,000 less than net income under absorption costing Net income under absorption costing will be $40,000 more than under variable costing. The difference in net income cannot be determined.

Explanation / Answer

The true statement is "Net income under variable costing will be $45,000 less than net income under absorption costing" as in Absorption costing, variable costs are taken before fixed costs. so out of $7 fixed manufacturing costs, $2.5 unit operating costs will be considered before fixed costs. while in variable costing all the fixed cost of $7*10000=$70,000 will be considered at once. so, the difference is $(7-2.5)*10000= $45000 will be increasing net income under Absorption costing.

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